Bundled Rebates: Forbidden Territory?

Non-healthcare case indicates that monopolists can be found liable despite pricing their products above costs.

One might wonder why people in the healthcare supply chain are so closely monitoring developments in a court case involving tape, Post-It Notes and office supplies. The LePage’s Inc. v. 3M Co. case was one of the most closely watched antitrust cases in the country because it focused on the practice of so-called “bundled rebates.” Since healthcare contracting practices sometimes use bundled product rebates, this industry has also become very interested in this case.

LePage’s Case
In the case, LePage’s Inc. of North York, Ontario claimed that 3M set out to drive LePage’s out of the market for transparent tape by offering “bundled” rebates to large retailers. LePage’s attorneys argued that the only way such rebates could be realized was by essentially removing LePage’s products from their shelves. Rebate deals like these, claimed LePage’s, amounted to “de facto” exclusive dealing arrangements.
The jury agreed, and an October 1999 verdict awarded LePage’s $22,828,899 in damages Ð a figure that was automatically trebled by U.S. District Judge John R. Padova, for a total judgment of $68,486,697. (A bond posted on appeal has now grown to more than $90 million during several years of appeals.) 3M appealed the verdict and, in its first appeal, prevailed when the 3rd U.S. Circuit Court of Appeals overturned the verdict by a 2-1 vote. However, the case was later reargued before a 10-judge en banc panel, which reinstated the verdict by a vote of 7-3.
Legal antitrust experts felt that the decision offered some potentially significant changes to legal rules. In her decision, Circuit Judge Dolores K. Sloviter found that LePage’s had built a valid case of illegal conduct by a monopolist by showing that 3M had lured away LePage’s biggest customers by offering bundled rebates that could be won only by meeting sales goals in six categories of 3M product lines.
“The principal anti-competitive effect of bundled rebates as offered by 3M is that when offered by a monopolist, they may foreclose portions of the market to a potential competitor who does not manufacture an equally diverse group of products and who therefore cannot make a comparable offer,” Sloviter wrote.

Supreme Court Decision
In June 2004, the U.S. Supreme Court decided not to hear the LePage’s case, effectively upholding the ruling in the lower court. The result: A monopolist could be found liable despite the fact that it had priced its product above costs.
Some legal analysts felt the court wanted to allow more cases of this nature to run through the courts before defining an overarching rule. Experts pointed out that by not hearing this case, the Supreme Court may be creating an incentive for smaller manufacturers to sue its larger rivals on the grounds of unfair trade practices, much like were seen in the LePage’s case.
Attorneys Richard A. Samp and Daniel J. Popeo of the Washington Legal Foundation had urged the justices to take up the case, arguing that the 3rd Circuit’s decision has created a chill that will ultimately harm consumers.
“Prior to the decision in this case, companies could engage in aggressive price competition without fear of antitrust repercussions, provided only that they did not sell below costs. But if the 3rd Circuit’s decision is allowed to stand, that safe harbor will no longer be available to companies,” Samp and Popeo wrote.

Impact on Healthcare
Issues similar to those raised in the LePage’s case have arisen in some healthcare contracting cases. For instance, the KCI v. Hill-Rom case involved the leasing of specialty hospital beds. Plaintiff KCI alleged that Hill-Rom, a competing manufacturer of specialty hospital beds, entered into group purchasing contracts that offered discounts on its standard hospital beds on the condition that the buyer also exclusively lease Hill-Rom’s specialty beds.
Hill-Rom was the dominant supplier of standard hospital beds and KCI offered only specialty beds. KCI’s complaint alleged that, among other things, Hill-Rom’s practice of tying its specialty beds to its standard beds Ð where it faced competition from KCI and held a 90 percent market share Ð as well as offering a bundled discount, foreclosed a substantial portion of the specialty bed market and violated the Sherman Act.
A jury agreed and awarded KCI $520 million in damages. (The parties eventually settled for $250 million dollars).

Conclusion
The LePage’s case raises some specific concerns in the healthcare contracting arena. First, because the industry engages in bundled rebates of certain products, could a jury find similar liability against a manufacturer of healthcare products if bundled with other products? And second, could liability also be found against the contracting agency, such as a GPO that managed the contract?
Bundling and bundled rebates can constitute an antitrust violation in scenarios similar to those of the LePage’s case. Members of the healthcare supply chain Ð including both manufacturers and contracting entities Ð must be cautious in regard to sales programs that utilize bundling.
It appears that by not reviewing the LePage’s case, the Supreme Court is allowing other lawsuits against manufacturers and, potentially, contracting agents, such as GPOs, to make their way through the U.S. court system. While it’s unclear what the result of these cases will be, it’s certain that a new argument can now be made by the lawyers of smaller manufacturers with concerns they have been harmed by large players and their contracting partners.
Will this result in new court cases in the healthcare supply chain? Quite possibly.

About the Author

Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit www.robertbetz.com.